You pay many different taxes throughout your life. The assets that comprise your estate are the resources that you were able to hang onto after paying all of these taxes.
It would be logical to assume that the event of your death should not be a taxable one. However, whether it is fair or not, there is an estate tax in place.
This tax can have a very profound impact on the future of your family. The maximum rate of the federal estate tax is 40 percent, and this can significantly erode the wealth that you have been able to accumulate.
Federal Estate Tax Exclusion
Before we look at the federal estate tax exclusion, we should touch upon the unlimited marital estate tax deduction. If you are legally married in the eyes of the law, you can transfer unlimited assets to your spouse tax-free.
There is however a caveat to the above statement. To utilize the unlimited marital estate tax deduction, you must be married to a citizen of the United States.
The federal estate tax exclusion is the amount that you can transfer to people other than your spouse free of taxation. For the rest of 2014, the federal estate tax exclusion is $5.34 million.
A base of $5 million was put into place for the 2011 calendar year, and each year since then there have been adjustments to account for inflation. An inflation adjustment will be applied in 2015 that will increase the estate tax exclusion to $5.43 million.
Federal Gift Tax
There is a federal gift tax that is unified with the federal estate tax. This tax is in place to stop people from giving gifts while they are living in an effort to avoid the estate tax.
The $5.34 million exclusion that we have in 2014 is a unified lifetime exclusion. It applies to taxable gifts that you give while you are living in addition to the value of your estate.
To explain by way of a simple example, if you gave $5.34 million in tax-free gifts throughout your life using the unified gift and estate tax exclusion, there would be nothing left to apply to your estate. As a result, the entirety of your estate would be subject to taxation.
Estate Tax Exclusion Portability
The estate tax exclusion is portable between spouses. This means that the surviving spouse could use the exclusion that was allotted to his or her deceased spouse. Using the figure that is in place for the rest of 2014, a surviving spouse would have a total exclusion of $10.68 million.
To Schedule a Free Consultation
If you are interested in the possibility of working with our firm after learning these facts, please select our “Workshops” tab to RSVP for a free estate planning workshop. At that workshop you will be offered a free one-hour consultation with an attorney: www.collinslawgroup.com/seminars/